Citi doesn't believe the RBA's growth forecasts and thinks it may cut this year

Photo by Ian Waldie/Getty Images

Economists at Citigroup aren’t as optimistic as the Reserve Bank of Australia’s when it comes to economic growth and inflation outlook.

The RBA will be forced to cut its forecast for both the measures in May, which would increase the odds for more monetary policy easing this year, Citi’s Paul Brennan, Joshua Williamson and Vivan Jiang said in their note.

It was unclear what would drive underlying inflation back to the central bank’s target, given that it has been stuck at 1.5% for four quarters, they said.

Citi’s comments come as the RBA’s quarterly statement on monetary policy last week said it sees underlying annual inflation returning to the bank’s 2-3% target by the middle of 2019, with economic growth picking up slightly to between 2.75% and 3.75% by the end of 2018.

These charts show Citi’s views on Australian growth and inflation

The broad economic outlook from the RBA is a “glass half full view,” the economists said.

“The ending of the downturn in mining investment will be helpful in supporting growth as housing activity cools next year, but a step up to above 3% growth next year as forecast will require stronger growth in consumer spending and non-mining business investment. Our own end 2018 forecasts envisage growth being slightly below the bottom of the RBA’s forecast.”

Citi said the earliest possibility of a live RBA meeting will be May 7, a suggestion far more bearish than other analysts looking towards a cut in the second-half of 2016.

Between now and May,the central bank would have seen three jobs reports and the first quarter inflation data, said Citi, which expects unemployment to nudge up to 6% from 5.8% now.

The RBA last cut rates in October.

“Our central case remains no change in rates this year, but that the market is underpricing the risk of easing,” the economists said.

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